There are multiple ways of determining a trend but one of the most convenient is using moving averages.

Moving averages are simple to calculate and, therefore, simple to understand. The one important factor you should always remember about them, is that they are a lagging indicator – they are based on past price action.

Some traders like to use exponential moving averages to try and minimise the lagging effect but this has its own issues. It gives greater weight to recent price action and, if there has been extreme turbulence in price recently, this can add to the confusion (rather than to help clarify).

It is therefore more straightforward to use simple moving averages but to be aware of the limitations.

In this article we will be looking at:

Which moving averages give us the best indication of trend direction

Moving averages as support/resistance

Golden and death crosses

Moving average alignment

The article will make the assumption that we are trend trading from a daily timeframe.

The 200 simple moving average

A commonly used moving average is the daily 200 simple moving average. It has been popular since technical analysis was in its infancy. It is easy to calculate, plot and interpret and does not move too fast or too slow in relation to current price.

It really is the mainstay of the moving average cohort. It should always be plotted on your daily charts. And, as a rule of thumb:

If price is trading above the daily 200 line you should only look to buy

If price is trading below the daily 200 line you should only look to sell

While the 200 line gives us a general bias (as to whether to look for long or short trading opportunities) it is generally too far from price to to apply any further significance.

So we need to look for another moving average which plays a little closer to price action.

The 50 simple moving average

The daily 50 simple moving average is another commonly used chart indicator. It only looks back 50 bars so will stay much closer to the current price.

In a good trend:

Price should stay above the 50 line in an uptrend

Price should stay below the 50 line in a downtrend

If the market is not trending then price will crisscross the 50 line (giving us a clear indication that we do not want to trade the chart).

During a good trend the 50 line should act as support (in an uptrend) or resistance (in a downtrend). Ideally price should stay a fair distance away but there will be times when price pulls back further than desired.

As with any other zone of support/resistance we cannot expect the 50 line to hold firm all the time – there may be minor breaches, especially at the beginning and towards the end of a trend. If the 50 line is breached look for further support/resistance levels in close proximity – as price may pullback towards these points before reversing. Look out for reversal/continuation chart and candlestick patterns at critical levels, too.

Golden and death crosses

A golden cross is where the shorter-term moving average crosses above the longer-term moving average.

A death cross is where the shorter-term moving average crosses below the longer-term moving average.

Using the two moving averages we have already discussed, a golden cross would be when the 50 line crosses above the 200 line. And a death cross would be when the 50 line crosses below the 200 line.

The moving averages can be any combination – not just the 50 and 200. It can be used on any type, such as exponential moving averages.

A golden cross is so-called because an uptrend is more likely to develop

A death cross is so-called because a downtrend is more likely to develop

It makes sense that near-term momentum is with the shorter-term moving average so, when it crosses a longer-term moving average, we would expect a trend to develop. However, this is dependent on the moving averages we are comparing.

If the two moving averages we are close to each other (e.g. 10 line and 20 line) they will crisscross frequently, even in a reasonable good trend. Even a fairly minor pullback could give a false signal that the trend is reversing.

And if the two moving averages are very far apart (e.g. 10 line and 200 line) they will only cross when price is almost upon the longer term moving average. We would not have any advance warning that the trend may be reversing.

Of course, most traders have other factors in their arsenal to help them anticipate a trend reversal. But in this article we are looking specifically at using moving averages to help us determine a trend. So we need our two moving averages to be in alignment.

Moving average alignment

The 50 line and 200 line are not two moving averages picked a random.

The 200 line has been an industry standard used by many traders as a ballpark of long-term strength or weakness.

The 50 line has also been commonly used as close enough to price action (to allow for the natural fluctuations of the market) yet also far enough away (not to be crisscrossed by price on a regular basis).

In order to determine the trend we need the following:

For an uptrend the 50 line must be above the 200 line

For a downtrend the 50 line must be below the 200 line

In addition to this we would ideally want both moving averages to be tilted in the direction of the trend. The sharper the clock angle, the faster the trend is likely to be (although be aware of the scale on your charts). This shows that momentum is with the trend.

The end of the trend

The end of a trend doesn’t necessarily occur as the reverse trend starts.

So if, for example, a chart had been in an uptrend for some time (with the 50 line above the 200 line) and then the 50 line crosses below the 200 line it is not necessarily the beginning of a bear trend.

A trend can be temporarily halted by a period of consolidation. During this time the 50 line and 200 line could remain flat and/or cross each other a number of times – without price making a decisive bull or bear move.

If price is in consolidation we do not want to trade it – so we wait for our alignment to reoccur and for the incline to be favourable to the direction of the new trend. The new trend could be a continuation of the old one – or a reversal.

Temptations

When new to trading many people are happy to use the 50 line and 200 line to help them determine the trend. But, after a while, they feel they could get into a trade earlier if they use a lower moving average rather than the 50 line.

Defining the trend is not the same as trading it. I am not advocating taking a long position every time the 50 line crosses above the 200 line, or a short position every time the 50 line crosses below the 200 line. This article only covers determining the current trend direction.

It is extremely useful to have a logical, fact-based rule for identifying the trend. In technical trading we want to remove as much subjectivity as possible.

So now you have a rational way of determining the trend. You can use this as the basis of your trading plan and build on it to then identify precise entry and exit points.

What is long term trading?

There is no formal definition – which doesn’t help – but generally I categorise them as follows:

Short-term – the aim is to be in and out of a trade within hours or days (to include day traders and scalpers)

Medium term – the aim is to be in a trade for a few days to a few weeks

Long term – to aim to be in a trade for weeks, months or even a year plus

These categories are the aim of the trade. It does not mean that we are restricted to staying in a trade which is going against us, or that we must exit a trade because our time is up. It purely applied to our intentions at the outset.

Once we start looking to be in trades for over a year I generally categorise it as investing – and into the realms of fundamental analysis – rather than technical trading. This is a completely different skillset and these people will probably be wanting to gain income (such as interest or dividends) in addition to capital growth.

In this article I will look at 5 reasons long term trading can work to your advantage.

Fewer opportunities required

One of the main advantages of long term trading is you aren’t required to find new opportunities every day. Finding good trades is the hardest aspect of trading because no-one knows how price will develop in the future.

There will always be losing trades – our success relies on our winners making more money than our losers lose. When trading long term we can stick with the winners – rather than cashing out and having to look for a new opportunity.

Every year there are a few good trends across the asset classes. Once we find them we need to stick with them as long as we can – and extract as much from the trend as we can.

And every year there are several so-called “once-in-a-lifetime” opportunities. These make up the bulk of our portfolio – but there will be a number of less successful or losing trades along the way. By hanging on and adding to our winners we can absorb many small losses (even if there are rather a lot of them).

While we ride the trend there will be pullbacks. It pays to take a more holistic approach to the overall big picture (and stay in the overriding trend) rather than try to be greedy (and attempt to buy all the dips and sell all the rallies). This is an inefficient approach especially during a good linear trend as the pullbacks will be small and shallow.

If you could trade five or six really good trends (moving very well over a few months) every year, would you still need to look for more opportunities? Of course, we have to find them. And this leads us on to the second advantage of long term trading – as we are spending less time trading we can, instead, spend more time planning.

More time to plan

It’s always easy to identify a good trend with hindsight. But we have to make our decisions at the right hand side of the chart.

By knowing you are looking to take a trade over weeks or months we can concentrate on analysing higher timeframes. At the Dynamic Trader we use:

Monthly, weekly and daily timeframes for analysis

Weekly or (more often) the daily timeframe for trade set-ups

Much of the noise (for example gaps and irregular candlesticks) is removed by looking at the daily timeframe (and above). If there is still an array of mishaps (such as large ranging bars with disproportionately long wicks) then we can disregard the chart as not suitable for our purpose – there are plenty more to choose from.

We also abide by the 3 second rule – if you can’t identify a good chart within 3 seconds of opening it then it should be discarded. Do not be concerned with scarcity – there are so many choices to trade it is difficult not to find a good one. Plus, if there really aren’t any trends in play then you need to be bold – and wait.

By removing the noise we can see more clearly where lines of support and/or resistance lie. This is the foundation of technical trading. There are a variety of commonly used levels, such as horizontal pivot points, to angled measures, such as a moving average. If price is below one of these levels then it is likely to act as resistance (possibly preventing price from moving higher). If price is above one of these levels it is likely to act as support (possibly preventing price from going lower).

Support and resistance is fundamental to chart and candlestick formations, too. These patterns are often described as a fight between the bulls (traders who want price to move higher) and the bears (traders who want price to move lower). These traders, en masse, will have a price below or above which they are prepared to let price fluctuate around, but beyond this, they are likely to accept defeat and remove themselves from the market.

By being able to clearly identify horizontal lines of support/resistance and any patterns we have more confidence that price will move in a more predictable way. This is nearly always easier on a larger timeframe. Technical trading for Dynamic Traders relies on probability – it is never a “sure thing” but there are certainly instances where future price action is a “pretty sure thing”.

Simple techniques

As touched upon, in the last section, technical trading doesn’t have to be complex.

The smaller the timeframe traders trade, the more they have to rely on intricate indicators. Because they cannot see the wood for the trees they have to use ever more complicated tools to help them identify what they can no longer see. They do not have the time to plan – which means they cannot differentiate between strong and weak support/resistance reversal zones. They are therefore obliged to get in and out quickly – without ever realising (until after the event) if price had the potential to move further in the trade direction.

When we take a step back, and give ourselves room to breathe, we can see the bigger picture. As when completing a jigsaw puzzle we have to take a logical approach. First we identify what we know (the ‘corner’ pieces) then we identify how to fit them together (with the ‘edges’) and, finally, we can build up the rest of the picture.

In trading we can take a similar puzzle-solving approach:

First, identify major areas of support/resistance (does a trend have room to develop?)

Finally, look for a logical and high probability point of entry and manage the trade

At the Dynamic Trader we have a number of simple trading tools to help us with this approach – as we want to exclude those charts which do not offer us the very best opportunities and, at the same time, we want the optimum entry and trade management techniques. Our trading tools help minimise losing trades and maximise profits from winning trades – but it is still possible to obtain trading success by following the simple rules above.

The advantages of long term trading is that you do not have to time your entry and exit precisely. So you do not require complex indicators to help you with timing or trend identification. If you miss fifty or a hundred ticks in a big trend, does that hugely affect your bottom line?

Clearly, if someone is trading on lower timeframes, they do not have time to consider their choices. If a trader is trading a five-minute chart then there is very little time to decide if the next bar will be higher/lower and therefore worth trading. This has two clear disadvantages: first, if a decision is not made then no money is made and, second, there is no time to check if there’s a better opportunity elsewhere.

When buying any other large ticket purchase (such as a house, car or even a vacuum cleaner) we wouldn’t limit ourselves to only a few seconds to make up our minds.

Of course the fact that we can make a quick decision doesn’t mean to say we should. We should never confuse action with decisiveness. We need direction, too.

Anyone in a high pressure job usually experiences burn-out within a few years. With long term trading there is little to no stress involved.

The advantages of reducing stress means that your right and left brain can function together:

Left brain: analytical thought, logic, knowledge, rules

Right brain: big picture, understanding, pattern recognition, risk

In his book “Thinking Fast and Slow” Daniel Kahneman identified that thinking quickly was not to our advantage the majority of the time – it did not give us time to judge the situation to the best of our ability. Most of the time this is not a problem – for everyday tasks. But trading (for the majority of people) is a unique task which requires, at least for the first few years, slower and more considered thinking.

This clearly shows that slow thinking is more appropriate to the traits required for trading. So take time over your analysis. And you can do this – and make well thought out decisions – by trading from a daily, or higher, timeframe.

Trading long term will give you confidence that you made the best choice based on the information you had available to you at the time. You won’t always be ‘right’ (the market can upset even the most high probability set-up). But you will have conviction in your ability to make good decisions – and over time the payback will be a high yielding equity curve – with little effort.

Less work

This is my favourite advantage of long term trading. Less work!

It is logical to conclude that if you have fewer bars to analyse then your analysis must be over in a shorter time. If a new bar is only being printed monthly, weekly or even daily there’s only so much you can do before you start repeating your analysis.

Earlier in the article I said that most Dynamic Traders trade from a daily chart. But this does not require analysis on a daily basis. Most of the ground work can be done at the weekend by identifying where the trends are. As mentioned before, Dynamic Traders have a number of tools to help identify tradeable charts – some of which are just beginning to trend (most trades will start this way) and others where trends are established (we will look to manage or add to our positions).

There is a weekly weekend routine you can follow, too.

Identify the trend on the monthly, weekly and daily charts (bullish if above the 200 line and any major resistance zones; and bearish if below the 200 line and any major support zones) – discard those which do not agree on all three timeframes

Identify recent price action (chart and candlestick patterns on any of the three timeframes)

Compile your watch list for the week ahead with any charts which looks close to a good entry (a defined breakout or pullback opportunity)

Then, on a daily basis, you are simply required to:

Check your watch list to see if any set-ups have occurred

Place an order if a set-up has occurred

Check to see if positions need managing (i.e moving the stop closer to price action or adding to the trade if trending well)

It will take some time to build up your watch list so stick with it – eventually you will have a great high-value set of opportunities to trade. Remember to include as many asset classes as you can afford to trade (e.g. stocks, forex and commodities). This will give you access to the best (potential) trends.

Once you have a good watch list it will only take you a couple of hours, at the most, each weekend to see if anything needs adding or removing. And each day it will take you a matter of minutes to check the list for new set-ups – and to manage any trades.

Less work means more play – so you have the rest of the day to sit back and relax with your favourite pastime!

Conclusion

Trading doesn’t have to be hard work, time-consuming, difficult or stressful.

Yes, it takes time to build up to this lifestyle – success is rarely achieved overnight. But, once mastered, long term trading will empower you to truly be in charge of your own life.

Poor Rudolph! He was a bit different from all the other reindeer and they laughed at him and called him names – they didn’t let poor Rudolph join in any of their games.

It’s not dissimilar to starting your trading career. Of all the traders I know, only a few of them told their close family and friends when they embarked on their trading journey. Like Rudolph they feared being ridiculed for being something a bit out of the ordinary.

But, in this lighthearted but potent piece in the run-up to Christmas, let’s see what characteristics traders share with the other reindeer.

Dasher (speed)

As a long term trend trader I wouldn’t say speed was the most appropriate attribute. To me, slow and steady wins the day.

Of course, Dasher and his team have only one night to visit all the children in the World so his agenda is somewhat different to mine. Don’t fall into the trap – that there’s only one trade-of-a-lifetime and you have to hurry not to miss it. Take your time and assess your options.

However, Dasher is a leader and becoming a retail trader sometimes means going against the well trodden path, too. Trading isn’t the most typical career choice – so some tenacity is required!

Dancer (grace)

Surprisingly grace resonates well with my style of trading. It is a graceful dance to get in and out of the markets in a dignified and well mannered nature.

When a trend plays out in a well-ordered way it is eloquent in its elegance. And to accept your wins, as well as your losses, with good grace is by far one of the better attributes of a trader.

Prancer (power)

On the one hand power donates ability and competence. These are essential skills of a trader.

On the other hand a trader must accept the power of the markets – however right you may think you are, the market has its own idea of where price should be heading. And it plays its hand very close to its chest, only allowing us to see the changes a little at a time.

Trying to control the markets is impossible (and probably illegal). Accept where the power lies and develop a strategy to work with the market rather than against it.

Vixen (beauty)

Vixen, like Dancer, adds a touch of glamour and beauty to trading. The glamour might be misleading though – we are often tempted by quick profits which can warp our thinking and distort our goals.

But once you have developed a trading style that not only works in the marketplace but also works for you, the beauty as trades unfold can be a wondrous sight to behold. It’s almost magical!

Comet (wonder and happiness)

There is certainly much to wonder at, as your trading skills grow. As comets reach for the stars, so too do our hopes and dreams when trading begins to make sense – and make money.

To be a good trader you need to display more positive traits then maybe you ever have before in your life. Becoming an all round better trader means becoming an all round better person – which in turn leads to an increase in happiness.

Cupid (love & joy)

A match made in heaven! While I frequently remind people that making money is boring, I do love trading. It offers me a lifestyle that fits well with both my personality type while also being challenging enough to keep me interested, mentally alert and active in the markets.

Certainly the cupid bow of trading struck me at an early age – the path of love was not smooth but it was worth the wait and the rewards.

Donder (thunder)

Trading is not without it’s overcast and thunderous days. Especially in the early years of trying to establish your trading style and methodology.

Blitzen (lightning)

Occasionally we have an epiphany in trading. A strike of lightning out of the blue.

It may be worth taking another approach, a personal characteristic you have that can be introduced or amended, or simply a fantastic “a-ha!” moment when everything falls into place.

Thunder and lightning often strike together so your epiphany may come from your darkest trading moments. It always pays to persevere and eventually you will see the light.

Rudolph saves the day

Rudolph was a bit of a latecomer to Santa’s party, having missed the stock market crash of 1929 and most of the 1930s depression. Maybe that’s why the other reindeer were not particularly fond of him – at first.

But they soon realised that change can be a great thing. Rudolph’s technologically advanced red nose helped them see through the fog – and get all those presents delivered in time to make Christmas Day special for everyone. That’s all the reindeer wanted – to spread happiness and joy.

You may find that those around you don’t want you to change either – this is the Rudolph Phenomenon. But once Santa saw Rudolph’s potential all the other reindeer suddenly wanted to be just like him, too.

It just takes one person to take a bold step for others to follow. You can be that person to make trading work – for you and your family.

As trend traders there are times when there is very little to trade in the markets. Even if we trade multiple markets there can still be periods when good clean trends elude us.

That means we sometimes have to stand aside – which can be easier said than done. Here are my top five tips for how to get through a trading slump.

Go on holiday

This is a great way to revive your trading. You don’t have to go on a holiday of a lifetime – just a few days away to break the boredom cycle should refresh you enough to allow a return to your trading. Even a fairly luxurious short break shouldn’t cost more than a few thousand and I have known of traders lose far more money trying to trade bad market conditions .

There are plenty of other activities you can pursue to take some respite. Take advantage of the break and go enjoy yourself.

Get back to basics

When we’re chasing trades we often throw our sensibilities out of the window. By taking some time out to go back to basics we remind ourselves of the foundations of trading.

As we trade primarily based on technical analysis, much of our focus is on support and resistance. So often, when trying desperately to find a trade in a sideways market, we selectively ignore the founding principles.

Support and resistance are the building block of technical analysis – be they horizontal or otherwise. We need to be reminded of this from time to time.

Review

If you find yourself chasing the trades then stop and review your trading log. This can be quite a lengthy exercise with two objectives.

Firstly, it will keep you out of trouble. If you’re reviewing your trades – looking at what works, what doesn’t, and why – you won’t have much time to take out new ill-conceived positions.

And second, you will eventually come to the conclusion that your well thought out trades (in a trending market) make you a lot more money than your poorly composed ones in a substandard market.

Revise

Don’t rule out the possibility that you may need to make some revisions to to your trading plan. How can you stop yourself over-trading in non-trending markets in the future?

Don’t be too hard on yourself – at the end of a trend the markets will obviously reverse and some losses are bound to be incurred. But at the same time be honest and see if there isn’t something you could do differently in the future to help minimize that cost.

Follow the money

Technically, if you can find another market to trade then the markets aren’t in a slump. But it’s surprising how many traders like to stick to just stocks or just forex or, worse still, one currency pair.

A good trend trading strategy should work on any trending market so there’s no need to stick to just one.

Commodities are now more accessible to trade with smaller accounts, too. So don’t get stuck in just one market – keep your options open.

And finally…

You don’t have to be actively trading to be active in the markets. Standing aside is sometimes the best position to be in – although it is sometimes unusual for longer term trend traders to have no positions open at all. So although new positions may be difficult to find (or even non-existent), you should nonetheless have a few trades still in play. This helps keep you motivated to continue your daily analysis despite the lack of new opportunities.

Of all the tips I have given here, I thoroughly recommend the first – to take time off.

In fact, it was on vacation some years ago that I learnt the value of having my money work for me. Without constant interference my few small trades transformed into quite sizable positions with very little participation on my part.

Pullbacks are part of trend development zones for trend traders. The depth of pullback can be concerning for some but for trend traders, the strategy alongside the money management and understand long term price action removes any emotion.

This week we look at:

ACE
DAL
HD
KR

All the above are in uptrends but we are awaiting fresh breakouts for trend continuations. If price fails to breakout then we will stand aside until price breaks support levels.

As retail traders gain more experience, many turn to longer term trading due to the advantages it holds. One of the definite advantages to holding positions for weeks or months is the lack of time required for trading. However, one aspect many find challenging is holding their nerve when there is a counter move against the main trend.

There are a number of steps you can add to your checklist to help you decide when a small market correction turns into a deep pullback and how to manage your stops to allow for some movement without giving too much equity back to the markets.

We will be covering the following items to help establish if a counter move is simply a bit of profit taking – or the end of the trend.

Duration

Depth

Support / Resistance

Chart / Candlestick patterns

When we have established how the trend, and our trade, is likely to be affected by the counter move then we can consider whether our stops need tightening – or not.

When profit taking turns into a deep pullback

Trend trading always has to allow for periods of profit-taking. Price rarely moves continuously up or down in a straight line – and never for extended periods.

Most of the time we welcome these corrections as – regardless of whether we trade breakouts or pullbacks – we get another chance to enter, or add to, our position.

But sometimes the counter-move is a little too deep and we start to notice a sizable dip in our equity curve.

Counter-trend duration

Pullback duration can vary from one market to the next. Trend traders are usually looking for the charts with small pullbacks, of maybe no more than 10-20 bars.

The ideal counter-trend move is three to five bars, which would usually form a small flag. This gives us time to reevaluate the trade and see if we want to add to our position. We do not feel rushed or panicked in any way and our open positions should easily be well within the stop loss range.

Provided the pullback is not too deep (covered in the next section) a sideways / consolidation move of more than 20 bars is acceptable to many trend traders. While it is frustrating, to be in a non-trending trade, unless the situation changes (i.e. the trend changes) there is little that should be done about it. You just have to monitor the position until price breaks either the resistance or support level.

Generally, within 10-20 bars, we can get an idea of the behaviour of the pullback without it affecting our equity adversely, so we remain comfortable with the move and unconcerned with tightening our stop losses.

But when the pullback is deeper than we would like, we will notice a dip in our equity and we may wonder just how far we should let price move before protecting our profits by tightening our stops.

Counter-trend depth

There are other ways to assess the depth of the pullback but for most beginners, on simple software, the 50ma is easy to calculate and identify. As price begins to approach this level then the pullback is probably beginning to get fairly deep.

Some trends hug the 50ma quite tightly so you may need to consider a buffer zone beyond this. But for most markets the 50ma acts as a good support / resistance to a well trending chart.

If price starts to close in on the 50ma, regardless of how many bars can be counted within it, you may want to move your stops closer to price action to protect your profits. However, there are few other factors you may want to take into consideration first so remain measured in your approach.

The 50ma is not only tool you have to provide levels of support or resistance.

Support or resistance zones

As price approaches the 50ma there may be other areas of support or resistance, which may help price bounce back in the direction of the trend.

Major pivot points (from previous price action) are a good example, as are round numbers or annual highs or lows. Even minor pivot points can help keep price on the right side of the trend.

Major pivots are those which stand out as major highs or lows. One example is a previous all time high or low. Minor pivots are those which happened recently – a recent high or low which price had to break to continue in the trend – such as a small pullback / flag.

Round numbers in multiples of 10, 50 or 100 for stocks (and some currencies) or 1s or 0.5s in currencies (e.g. 1.0000 or 2.5000) can also act as support / resistance.

If any of these occur just before the 50ma level, or just beyond, then price may well reverse at these points rather than at the moving average.

Often you will see further confirmation that the counter move is exhausted with a candlestick pattern or chart formation.

Chart patterns

As previously mentioned, a three to five bar pullback is a popular move and is often a flag formation. When the counter move becomes more prolonged, such as 10-20 bars or more, then there are other chart patterns you may spot.

Being able to identify some of the more common chart patterns is useful as it will give you confidence that the trend is likely to continue – even if the pullback has grown to more than 20 bars or is a little deeper than you would like (such as touching the 50ma).

There are numerous chart patterns but in our experience, the more common and reliable ones for use in this situation, are flags, double tops / bottoms, head and shoulders and (maybe) a cup and handle.

If you can see any of these developing then you may want to hold off tightening your stops – even if price has retraced a little more than desired or the duration is beyond 20 bars. Without breaching any of your stop loss rules, see if you can allow a little more breathing space for these chart patterns to unfold.

With the exception of the cup and handle, you should use candlestick patterns to help you identify the axis of these chart formations as they develop. Again, this adds to your confidence that stops can remain further away (to prevent you getting stopped out by just a few ticks) as you read price action.

Candlestick patterns

As with chart patterns, candlesticks can be a helpful tool – but you don’t need to know all of them. In this instance we’re only interested in ones that signify a possible reversal, such as doji, hammer, inverted hammer, shooting star, hanging man and engulfing candlesticks.

On their own, in our counter trend scenario, these candlestick formations are not of particular interest. But if you see them as the axis of a flag, double bottom / top or head and shoulders (as these chart patterns are under construction) you have yet another “tick” on your checklist that the pattern is more likely to develop – which means the trend is more likely to continue.

Stick to your convictions

So we now have four items we can use as the basis of our counter-trend analysis.

Sometimes we will only need one to remain confident that the pullback will have little impact on the overall trend – or that we need to tighten stops. We don’t want to tighten stops unless necessary as we have to let the trend develop at it’s own pace and in it’s own way.

But sometimes, if the move is prolonged or deeper than expected, we need other measures in place to stop us being panicked into tightening stops – a move we might later regret if the trend continues.

Having guidelines in place help us stick to the plan and have confidence in our trading.

TDT Tip: Trend traders never get out at the extreme of the trend so you will always have to give a little bit back to the markets. This can seem like a lot if you are trading multiple positions on one trade. Remember that any well thought out trade which is in the black is an excellent trade. So make sure your overall position is risk-free as soon as you can – then try not to worry about the monetary value.

Trend trading is not about getting in right at the start of the trend and out right at the end. There are all sorts of obstacles to overcome on the way. You can make these insurmountable or you can make them simple and logical. Successful traders choose the latter.